A lot goes into planning for the division of marital assets during divorce. And while it's not a very exciting subject for most people, tax planning is a big part of that. The reason this is so vital is that taxes have different impacts on different assets. What should you know about the tax consequences when dividing specific assets? Here's are 5 of the most common transfers.
1. The Family Home
If you plan to sell the marital home and divide the proceeds, you may have few, if any, tax effects. This is because of the $250,000 exemption on profit (subject to rules) for selling a primary home. If your home sells for an amount higher than the exemption, you both will likely have equal tax responsibility. However, if one spouse will keep the home, they should prepare to lose the spouse's portion of that exemption if they sell it later.
2. Stocks and Bonds
A taxable investment portfolio, like most other assets transferred during divorce, generally has no immediate tax consequences. However, taxes will be due when the receiving spouse sells the stocks or bonds within the portfolio. These taxes, known as capital gains, may be at or below the tax rate of their wages and salary. The basis for determining profits will be the transferring spouse's own basis.
3. IRA and 401(k) Plans
Traditional IRA and 401(k) plans are not taxed when the money is contributed. This means if you receive retirement funds in these accounts, you will pay taxes on withdrawals later on. This will significantly reduce the amount available to use, so you may need to take into account the rate of future taxation to come up with an equitable net amount.
4. Roth IRA and Roth 401(k) Plans
Roth IRA and 401(k) plans are the opposite of traditional ones. Contributions to these are taxed when the money is put into the account and are generally tax-free when it is withdrawn. If these assets are transferred, your spouse has already paid the tax and you can expect little or no tax consequences for using them. These, then, are easier to split and may be more advantageous.
5. Other Real Estate
Finally, real estate that is not your primary home (such as rentals or a vacation cabin) will be taxed as all other capital assets when it's sold. As with stocks and bonds, your tax basis for determining the tax bill will be the basis—or investment—of the spouse who transferred it. So you will need to know this information when receiving the transfer.
Where to Learn More
Clearly, the marital assets during a divorce can all have very different effects on your future finances. The best place to begin planning how you will minimize tax consequences is to meet with an experienced accountant who specializes in tax planning in your state. Together, you will build a plan that sets you up for success in your post-divorce lifeShare